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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 6, 2003, 16,768,519 shares of Registrant's Common Stock, $0.01
par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
July 5, January 4,
2003 2003
----------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,022 $ 1,098
Accounts receivable, less reserves of $1,731 and $1,826 at
July 5, 2003 and January 4, 2003, respectively 40,538 42,346
Inventories 43,898 50,407
Prepaid and deferred income taxes 3,102 4,080
Production supplies 1,670 1,634
Prepaid insurance 1,159 2,130
Other current assets 6,627 6,250
-------- --------
Total current assets 98,016 107,945
Property, plant and equipment, net 168,062 173,790
Other assets:
Goodwill 5,432 5,432
Other assets 1,537 1,519
-------- --------
Total assets $273,047 $288,686
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 5,000 $ 5,000
Accounts payable 12,010 15,559
Accrued expenses 10,120 12,578
-------- --------
Total current liabilities 27,130 33,137
Long-term debt 47,500 61,200
Deferred income taxes 31,496 30,643
Other long-term liabilities 2,188 1,901
Redeemable preferred stock:
Series A convertible, $0.01 par value per share, liquidation
preference $1,000 per share, 50,000 shares authorized, none issued -- --
Stockholders' equity:
Common stock, $0.01 par value per share, 40,000,000 shares authorized;
16,760,026 and 16,146,026 shares issued and outstanding as of
July 5, 2003 and January 4, 2003, respectively 168 161
Additional paid-in capital 88,666 87,668
Unearned compensation (802) (901)
Retained earnings 78,606 76,964
Accumulated other comprehensive loss (1,905) (2,087)
-------- --------
Total stockholders' equity 164,733 161,805
-------- --------
Total liabilities and stockholders' equity $273,047 $288,686
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------ -------------------
July 5, June 29, July 5, June 29,
2003 2002 2003 2002
------- -------- -------- --------
(Unaudited) (Unaudited)
Net sales $73,886 $101,931 $164,111 $201,963
Cost of products sold 59,401 78,803 130,659 156,235
------- -------- -------- --------
Gross profit 14,485 23,128 33,452 45,728
Selling, general and administrative expenses 13,298 14,887 27,549 29,384
------- -------- -------- --------
Operating income 1,187 8,241 5,903 16,344
Other expenses:
Interest expense 991 1,139 2,060 2,208
Other, net 113 (11) 89 (6)
------- -------- -------- --------
Income before provision for income taxes 83 7,113 3,754 14,142
Provision for income taxes (82) 2,632 1,276 5,233
------- -------- -------- --------
Net income $ 165 $ 4,481 $ 2,478 $ 8,909
======= ======== ======== ========
Earnings per common share - basic (Note 1) $ 0.01 $ 0.28 $ 0.15 $ 0.56
======= ======== ======== ========
Earnings per common share - diluted (Note 1) $ 0.01 $ 0.26 $ 0.15 $ 0.53
======= ======== ======== ========
Dividends per common share $ 0.025 $ -- $ 0.05 $ --
======= ======== ======== ========
Weighted average shares outstanding - basic (Note 1) 16,724 15,972 16,570 15,915
======= ======== ======== ========
Weighted average shares outstanding - diluted (Note 1) 16,950 17,063 16,857 16,904
======= ======== ======== ========
- -------------------------------------------------------------------------------------------------
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Three Months Ended Six Months Ended
------------------ ------------------
July 5, June 29, July 5, June 29,
2003 2002 2003 2002
------- -------- ------- --------
(Unaudited) (Unaudited)
Net income $165 $4,481 $2,478 $8,909
---- ------ ------ ------
Other income (loss)
Foreign currency translation adjustments 217 (243) 182 (241)
Unrealized loss on hedging instruments 18 50 -- --
---- ------ ------ ------
Other compensation income (loss) 235 (193) 182 (241)
---- ------ ------ ------
Comprehensive income $400 $4,288 $2,660 $8,668
==== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements
2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
-------------------
July 5, June 29,
2003 2002
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income $ 2,478 $ 8,909
Adjustments to reconcile net
income to net cash provided by operating activities:
Depreciation and amortization 9,599 8,582
Amortization of unearned compensation 99 26
Deferred income taxes 853 3,116
Tax benefit related to exercise of common stock options 402 733
Changes in operating assets and liabilities:
Accounts receivable 1,885 (5,297)
Inventories 6,624 (7,409)
Prepaid expenses and other assets 1,491 (716)
Accounts payable and accrued expenses (6,007) 261
Other long-term liabilities 287 16
-------- --------
Net cash provided by operating activities 17,711 8,221
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,844) (20,636)
-------- --------
Cash flows from financing activities:
Change in revolving credit facility (13,700) 7,300
Repayments of capital lease obligations -- (506)
Proceeds from exercise of common stock options and
issuance of shares under the employee stock purchase plan 603 1,325
Proceeds from issuance of long-term debt -- 5,000
Capitalization of deferred financing costs -- (130)
Cash dividends (836) --
-------- --------
Net cash provided by (used in) financing activities (13,933) 12,989
-------- --------
Effect of exchange rates on cash (10) 203
-------- --------
Net increase (decrease) in cash (76) 777
Cash and cash equivalents, beginning of period 1,098 600
-------- --------
Cash and cash equivalents, end of period $ 1,022 $ 1,377
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position, results of operations and
cash flows for the interim periods presented. The unaudited consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted pursuant to those rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented not
misleading. Operating results for the six months ended July 5, 2003 are not
necessarily indicative of the results expected for the full fiscal year or any
future period. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended January 4, 2003.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. For
diluted earnings per share, the denominator also includes dilutive outstanding
stock options determined using the treasury stock method. The following table
reconciles weighted average common shares outstanding to weighted average common
shares outstanding and dilutive potential common shares.
Three Months Ended Six Months Ended
------------------ ------------------
July 5, June 29, July 5, June 29,
2003 2002 2003 2002
------- -------- ------- --------
(In thousands)
Weighted average common shares outstanding 16,724 15,972 16,570 15,915
Dilutive potential common shares 226 1,091 287 989
------ ------ ------ ------
Weighted average common shares outstanding
and dilutive potential common shares 16,950 17,063 16,857 16,904
====== ====== ====== ======
Antidilutive options 1,838 86 1,838 334
====== ====== ====== ======
4
Reclassifications
Certain reclassifications have been made to the Fiscal 2002 balances to
conform to the current year presentations.
Note 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. A standard cost system is used and approximates
cost on a first in, first out (FIFO) basis. Cost for financial reporting
purposes is determined by the last-in, first-out (LIFO) method.
Inventories at July 5, 2003 and January 4, 2003 consisted of the following:
July 5, January 4,
2003 2003
------- ----------
Raw materials $20,146 $24,984
Work-in-process 9,494 8,930
Finished goods 13,391 13,786
------- -------
Inventory at FIFO 43,031 47,700
LIFO adjustment 867 2,707
------- -------
Inventory at LIFO $43,898 $50,407
======= =======
LIFO inventory values are higher than FIFO costs because current
manufacturing costs are lower than the older historical costs used to value
inventory on a LIFO basis.
Note 3 - SEGMENT REPORTING
The Company operates as a single business segment consisting of sales of
two products, upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.
5
Gross foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:
Three Months Ended Six Months Ended
------------------ ------------------
July 5, June 29, July 5, June 29,
2003 2002 2003 2002
------- -------- ------- --------
(In thousands)
North America (excluding USA) $ 6,002 $ 8,617 $12,338 $15,525
Middle East 675 815 1,132 2,833
South America 579 737 1,196 1,509
Europe 941 1,511 1,992 2,600
All Other 983 1,121 1,826 1,766
------- ------- ------- -------
$ 9,180 $12,801 $18,484 $24,233
======= ======= ======= =======
Gross sales by product category are as follows:
Three Months Ended Six Months Ended
------------------ -------------------
July 5, June 29, July 5, June 29,
2003 2002 2003 2002
------- -------- -------- --------
(In thousands)
Fabric $72,529 $ 97,842 $160,457 $195,458
Yarn 2,224 5,571 5,247 9,179
Other 225 92 589 417
------- -------- -------- --------
$74,978 $103,505 $166,293 $205,054
======= ======== ======== ========
Note 4 - ACCOUNTING FOR STOCK BASED COMPENSATION
Accounting for Stock Based Compensation. The Company has elected to
continue to account for its stock option plans under APB 25 and related
interpretations as well as to provide disclosure of stock based compensation as
outlined in SFAS 123 as amended by SFAS 148. SFAS 123 requires disclosure of pro
forma net income, EPS and other information as if the fair value method of
accounting for stock options and other equity instruments described in SFAS 123
had been adopted. The following table illustrates the effect on net income and
earnings per share as if the Black-Scholes fair value method described in SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended, had been applied
to the Company's stock option plans.
6
Three Months Ended Six Months Ended
------------------- ------------------
July 5, June 29, July 5, June 29,
2003 2002 2003 2002
-------- -------- ------- --------
(In thousands) (In thousands)
------------- -------------
(Unaudited) (Unaudited)
Net income, as reported $ 165 $4,481 $2,478 $8,909
Add: Stock-based employee compensation
expense included in net income, net of
related tax effects 34 17 65 16
Less: Stock-based employee compensation
expense determined under Black-Scholes
option pricing model, net of related tax effects 264 241 528 461
----- ------ ------ ------
Pro forma net income (loss): (65) $4,257 $2,015 $8,464
===== ====== ====== ======
Earnings per common share - basic
As reported $0.01 $ 0.28 $ 0.15 $ 0.56
Pro forma $0.00 $ 0.27 $ 0.12 $ 0.53
Earnings per common share - diluted
As reported $0.01 $ 0.26 $ 0.15 $ 0.53
Pro forma $0.00 $ 0.25 $ 0.12 $ 0.50
Note 5 - INCOME TAXES
The Company is currently challenging tax assessments from the Internal
Revenue Service for the years 1997-1999 and from the Massachusetts Department of
Revenue 1993-1998, the ultimate resolution of which is not expected to have a
material impact on the results of operations or financial position of the
Company. In addition, during the third quarter, the Company began the process of
filing amended returns for these and subsequent years to claim approximately
$3.5 million of federal and state research and development credits. There is
significant uncertainty surrounding the amount and timing of benefit that will
be ultimately realized. The Company believes that it has a supportable basis for
claiming these credits, but the amounts are subject to review by federal and
state authorities. Accordingly, the Company has not reflected the potential
benefits of these credits in its financial statements for these or subsequent
years. No benefit will be recognized in the financial statements until these
gain contingencies are resolved through the eventual disposition with the
respective tax authorities.
Note 6 - POTENTIAL ASSET IMPAIRMENT
Due primarily to a continued trend of declining yarn sales, the Company has
temporarily idled certain yarn manufacturing equipment for an estimated period
of 12 to 18 months. Management believes this equipment will be needed to support
the Company's future fabric business. In conjunction with this action,
management performed an impairment analysis in
7
accordance with Financial Accounting Standards Board Statement No. 144 (FAS
144). Based on management's estimates, the expected future cash flows generated
by this equipment are not less than the carrying value of the equipment as of
July 5, 2003 and therefore no impairment was recognized.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 1. "Fiscal 2002" was a 53 week period ended January 4, 2003
and "Fiscal 2003" will be a 52 week period ending January 3, 2004. The first six
months of Fiscal 2002 and Fiscal 2003 ended June 29, 2002 and July 5, 2003,
respectively.
The Company typically will shut down operations for vacation and annual
maintenance during the first two weeks in July. As a result, the second quarter
of 2003 contained 12 operating weeks versus 13 weeks in the prior year period.
The first half of 2003 contained 25 operating weeks versus 26 weeks in the prior
year period.
Critical Accounting Policies
The Company considered the disclosure requirements of Financial Reporting
Release No. 60 regarding critical accounting policies and Financial Reporting
Release No. 61 regarding liquidity and capital resources, certain trading
activities and related party/certain other disclosures, and concluded that there
were no material changes during the first six months of 2003 that would warrant
further disclosure beyond those matters previously disclosed in the Company's
Annual Report on Form 10-K for the year ended January 4, 2003.
Results of Operations - Quarterly Comparison
Net sales for the second quarter of 2003 decreased $28.0 million or 27.5%,
to $73.9 million from $101.9 million for the second quarter of 2002. The overall
weighted average gross sales price per yard increased 4.2%, to $5.66 for the
second quarter of 2003 from $5.43 for the second quarter of 2002. The average
gross sales price per yard of middle to better-end fabrics increased by 5.1%, to
$6.60 in the second quarter of 2003 as compared to $6.28 in the second quarter
of 2002. The average gross sales price per yard of promotional-end fabric was
$4.06 in the second quarter of 2003 as compared to $3.98 in the second quarter
of 2002. The gross volume of fabric sold decreased 28.8%, to 12.8 million yards
for the second quarter of 2003 from 18.0 million yards for the second quarter of
2002. Middle to better-end fabrics represented 73.4% of fabric sales during the
second quarter of 2003 compared to 72.9% in the second quarter of 2002. The
Company sold 28.9% fewer yards of middle to better-end fabrics and 28.7% fewer
yards of promotional-end fabrics in the second quarter of 2003 than in the
second quarter of 2002.
The Company's new order rate declined approximately 18% during the second
quarter of 2003 as compared to the second quarter of 2002, and the Company's
backlog decreased by approximately 36% to $24.5 million at the end of the second
quarter of 2003 as compared to
8
$38.6 million at the end of the second quarter of 2002. The decline in the new
order rate and backlog position resulted primarily from economic and political
concerns negatively affecting both domestic and international markets as well as
steps taken to significantly reduce the Company's average delivery lead time to
customers.
Gross fabric sales within the United States decreased 25.5%, to $63.3
million in the second quarter of 2003 from $85.0 million in the second quarter
of 2002. Foreign and Export sales decreased 28.3%, to $9.2 million in the second
quarter of 2003 from $12.8 million in the second quarter of 2002. Gross yarn
sales decreased 60.1%, to $2.2 million in the second quarter of 2003 from $5.6
million in the same period of 2002.
The gross profit margin for the second quarter of 2003 decreased to 19.6%,
as compared to 22.7% for the second quarter of 2002. Due to a decline in orders
during the quarter, the Company adjusted its production rates to levels
consistent with the lower order rates and to reduce inventory levels. The
decrease in the gross margin percentage resulted primarily from higher fixed
costs per unit attributable to lower production volumes as well as fairly
significant quarter over quarter increases in insurance and depreciation costs
which were partially offset by a decrease in manufacturing overtime costs.
Selling, general and administrative expenses decreased to $13.3 million for
the second quarter of 2003 from $14.9 million for the second quarter of 2002.
Selling, general and administrative expenses as a percentage of net sales
increased to 18.0% in the second quarter of 2003 from 14.6% in the second
quarter of 2002. The increase in selling, general and administrative expenses as
a percentage of sales was due to lower sales volume in combination with higher
sampling expenses and higher insurance costs.
Interest expense was $1.0 million for the second quarter of 2003 and $1.1
million for the second quarter of 2002. Lower levels of variable rate debt and
lower variable interest rates in the second quarter of 2003 resulted in the
decline in interest expense.
The Company provides for income taxes on an interim basis, using an
estimated annual effective income tax rate. The Company's estimated tax rate was
37% for 2002 and the first quarter of 2003. The Company has adjusted the
estimated annual effective tax rate for 2003 downward to 34% resulting in a tax
benefit of $82 for the second quarter of 2003. This reduction in the tax rate is
due to lower levels of projected income for 2003 reducing the effective
statutory federal tax rate from 35% to approximately 34% and an increased
estimated benefit to the tax rate from the Extraterritorial Income Exclusion.
The effective income tax rate is lower than the combined federal and state
statutory rates, due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level.
The Company is currently challenging tax assessments from the Internal
Revenue Service for the years 1997-1999 and from the Massachusetts Department of
Revenue 1993-1998, the ultimate resolution of which is not expected to have a
material impact on the results of operations or financial position of the
Company. In addition, during the third quarter, the Company began the process of
filing amended returns for these and subsequent years to claim approximately
$3.5 million of federal and state research and development credits. There is
significant uncertainty surrounding the amount and timing of benefit that will
be ultimately realized. The Company believes that it has a supportable basis for
claiming these credits, but the amounts are subject to review by federal and
state authorities. Accordingly, the Company has not reflected the potential
benefits of these credits in its financial statements for these or subsequent
years. No benefit will be recognized in the financial statements until these
gain contingencies are resolved through the eventual disposition with the
respective tax authorities.
9
Net income for the second quarter of 2003 decreased to $165 thousand or
$0.01 per common share-diluted, from $4.5 million or $0.26 per common
share-diluted for the second quarter of 2002.
Results of Operations - Six-month Comparison
Net sales for the first half of 2003 decreased $37.9 million or 18.7%, to
$164.1 million from $202.0 million for the first half of 2002. The overall
weighted average gross sales price per yard increased 1.3%, to $5.58 for the
first half of 2003 from $5.51 for the first half of 2002. The average gross
sales price per yard of middle to better-end fabrics increased by 3.3%, to $6.55
in the first half of 2003 as compared to $6.34 in the first half of 2002. The
average gross sales price per yard of promotional-end fabric was $4.05 in the
first half of 2003 as compared to $4.01 in the first half of 2002. The gross
volume of fabric sold decreased 18.9%, to 28.8 million yards for the first half
of 2003 from 35.5 million yards for the first half of 2002. Middle to better-end
fabrics represented 71.9% of fabric sales during the first half of 2003 compared
to 74.1% in the first half of 2002. The Company sold 23.0% fewer yards of middle
to better-end fabrics and 11.5% fewer yards of promotional-end fabrics in the
first half of 2003 than in the first half of 2002.
The Company's new order rate declined approximately 18% during the first
half of 2003 as compared to the first half of 2002, and the Company's backlog
decreased by approximately 36% to $24.5 million at the end of the first half of
2003 as compared to $38.6 million at the end of the first half of 2002. The
decline in the new order rate and backlog position resulted primarily from
economic and political concerns negatively affecting both domestic and
international markets as well as steps taken to significantly reduce the
Company's average delivery lead time to customers.
Gross fabric sales within the United States decreased 17.1%, to $142.0
million in the first half of 2003 from $171.2 million in the first half of 2002.
Foreign and Export sales decreased 23.7%, to $18.5 million in the first half of
2003 from $24.2 million in the first half of 2002. Gross yarn sales decreased
42.8%, to $5.2 million in the first half of 2003 from $9.2 million in the same
period of 2002. The decline in domestic and international sales is primarily
attributable to political and economic issues that adversely affected the demand
for furniture and upholstery fabric.
The gross profit margin for the first half of 2003 decreased to 20.4%, as
compared to 22.6% for the first half of 2002. Due to a decline in orders during
the first half of 2003, the Company adjusted its production rates to levels
consistent with the lower order rates. The decrease in the gross margin
percentage resulted primarily from higher fixed costs per unit attributable to
lower production volumes and well as fairly significant period over period
increases in energy, insurance and depreciation costs which were partially
offset by a decrease in manufacturing overtime costs.
Selling, general and administrative expenses decreased to $27.5 million for
the first half of 2003 from $29.4 million for the first half of 2002. Selling,
general and administrative expenses as a percentage of net sales increased to
16.8% in the first half of 2003 from 14.5% in the first half of 2002. The net
increase in selling, general and administrative expenses as a
10
percentage of sales was due to lower sales volume in combination with higher
sampling expenses and higher professional fees.
Interest expense decreased to $2.1 million for the first half of 2003 from
$2.2 million in the same period of 2002. Lower levels of variable rate debt in
the first half of 2003 and lower interest rates resulted in the decline of
interest expense.
The Company provides for income taxes on an interim basis, using an
estimated annual effective income tax rate. The Company's estimated tax rate was
37% for 2002 and the first quarter of 2003. The Company has adjusted the
estimated annual effective tax rate for 2003 downward to 34% resulting in a tax
benefit of $82 for the second quarter of 2003. This reduction in the tax rate is
due to lower levels of projected income for 2003 reducing the effective
statutory federal tax rate from 35% to approximately 34% and an increased
estimated benefit to the tax rate from the Extraterritorial Income Exclusion.
The effective income tax rate is lower than the combined federal and state
statutory rates, due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level.
The Company is currently challenging tax assessments from the Internal
Revenue Service for the years 1997-1999 and from the Massachusetts Department of
Revenue 1993-1998, the ultimate resolution of which is not expected to have a
material impact on the results of operations or financial position of the
Company. In addition, during the third quarter, the Company began the process of
filing amended returns for these and subsequent years to claim approximately
$3.5 million of federal and state research and development credits. There is
significant uncertainty surrounding the amount and timing of benefit that will
be ultimately realized. The Company believes that it has a supportable basis for
claiming these credits, but the amounts are subject to review by federal and
state authorities. Accordingly, the Company has not reflected the potential
benefits of these credits in its financial statements for these or subsequent
years. No benefit will be recognized in the financial statements until these
gain contingencies are resolved through the eventual disposition with the
respective tax authorities.
Net income for the first half of 2003 decreased to $2.5 million, or $0.15
per common share-diluted, from $8.9 million or $0.53 per common share-diluted,
for the first half of 2002.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement (as hereinafter defined), and debt and equity
offerings. The Company's capital requirements have arisen principally in
connection with (i) the purchase of equipment to expand production capacity,
introduce new technologies to broaden and differentiate the Company's products,
and improve the Company's quality and productivity performance, (ii) increases
in the Company's working capital needs related to its sales growth, and (iii)
investments in the Company's information technology systems.
The primary source of the Company's liquidity and capital resources has
been operating cash flow. The Company's net cash provided by operating
activities was $17.7 million and $8.2 million in the first six months of 2003
and 2002, respectively. As necessary, the Company supplements its operating cash
flow with borrowings. Net borrowings (repayments) were ($13.7) million in the
first half of 2003 and $11.8 million in the first half of 2002.
11
Capital expenditures in the first six months of 2003 and 2002 were $3.8
million and $20.6 million, respectively. Capital expenditures during the first
six months of 2003 were funded by operating cash flow. Management anticipates
that capital expenditures for new projects will total approximately $10.0
million in 2003, consisting principally of $5.0 million for various
manufacturing equipment, $2.0 million for IT projects, $1.1 million to acquire a
currently leased manufacturing facility and $1.9 million for various other
capital projects. Additionally, the Company is analyzing several financing
alternatives in connection with the possible development of additional
manufacturing and warehousing facilities in the Fall River area. Management
believes that operating income and borrowings under the Credit Agreement (as
hereinafter defined) will provide sufficient funding for the Company's capital
expenditures and working capital needs for the foreseeable future.
The Company issued $45.0 million of Senior Notes due October 2005 and 2007
(the Senior Notes) during 1997. The Senior Notes bear interest at a fixed rate
of 7.09% on $15.0 million and 7.18% on $30.0 million. Annual principal payments
begin on October 10, 2003 with a final payment due October 10, 2007. Annual
principal payment amounts are three payments of $5.0 million beginning in 2003
followed by two payments of $15.0 million beginning in 2006.
On February 14, 2002, the Company issued $5.0 million of 7.56% Series A
Notes due February 2009 (the "Series A Notes"). The Series A Notes are unsecured
and bear interest at a fixed rate of 7.56%, payable semiannually. The Series A
Notes may be prepaid in whole or in part prior to maturity, at the Company's
option, subject to a yield maintenance premium, as defined. In addition and also
on February 14, 2002, the Company entered into a $45.0 million non-committed
shelf note agreement with an insurance company pursuant to which the Company may
issue additional senior notes prior to February 14, 2005 with maturity dates of
up to ten years.
The Company also has a $60.0 million Credit Agreement with a bank which
expires January 31, 2007 (the Credit Agreement). As of July 5, 2003, the Company
had $2.5 million outstanding under the Credit Agreement and unused availability
of $57.3 million. See Note 5 of Notes to Consolidated Financial Statements
included in the Company's 2002 Annual Report on Form 10-K.
The Company is required to comply with a number of affirmative and negative
convenants under the Credit Agreement, the Senior Notes, and the Series A Notes,
including, but not limited to, maintenance of certain financial tests and ratios
(including interest coverage ratios, net worth related ratios, and net worth
requirements); limitations on certain business activities of the Company;
restrictions on the Company's ability to declare and pay dividends, incur
additional indebtedness, create certain liens, incur capital lease obligations,
make certain investments, engage in certain transactions with stockholders and
affiliates, and purchase, merge, or consolidate with or into any other
corporation. The Company is currently in compliance with all the affirmative and
negative convenants in the Credit Agreement, the Series A Notes, and the Senior
Notes and management believes the Company's continued compliance will not
prevent the Company from operating in the normal course of business.
The Company has historically not paid dividends, instead using earnings to
fuel growth and capital equipment requirements. On March 3, 2003, the Company's
Board of Directors adopted a new dividend policy reflecting Quaker's intention
to pay quarterly dividends going forward, with the level of each dividend
payment, if any, to be determined by Quaker's Board of
12
Directors based on a number of factors, including the Company's financial
performance, cash flows and cash requirements. On April 24, 2003, the Board of
Directors approved and announced the payment of a cash dividend of $0.025 per
common share payable on May 23, 2003 to stockholders of record on May 9, 2003.
On July 23, 2003 the Board of Directors approved and announced the payment of a
cash dividend of $0.025 per common share payable on August 22, 2003 to
stockholders of record on August 8, 2003.
Inflation
The Company does not believe that inflation has had a significant impact on
the Company's results of operations for the periods presented. Historically, the
Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee
productivity, and by reflecting the effects of inflation in the selling prices
of the new products it introduces each year.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements made by the
Company that are prefaced by the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," "designed" and similar expressions,
are intended to identify forward-looking statements regarding events, conditions
and financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances about which the Company can give no firm
assurance. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon as
a prediction of the Company's actual future financial condition or results.
These forward-looking statements, like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or anticipated. Such risks and uncertainties include
product demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of competitive
products and pricing, foreign currency exchange rates, changes in customer
ordering patterns, and the effect of uncertainties in markets outside the U.S.
(including Mexico and South America) in which the Company operates.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
Quantitative and Qualitative Disclosures About Market Risk
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The Company's exposures relative to market risk are due to foreign exchange
risk and interest rate risk.
Foreign currency risk
Approximately 2.9% of the Company's revenues are generated outside the U.S.
from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in certain foreign countries in
local currency. Accordingly, in the absence of hedging activities whenever the
U.S. dollar strengthens relative to the other major currencies, there is an
adverse affect on the Company's results of operations, and alternatively,
whenever the U.S. dollar weakens relative to the other major currencies, there
is a positive affect on the Company's results of operations.
It is the Company's policy to minimize, for a period of time, the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments to hedge the fair value
of foreign currency denominated intercompany payables. The Company's primary
foreign currency exposures in relation to the U.S. dollar are the Mexican peso
and the Brazilian real.
At July 5, 2003, the Company has the following derivative financial
instruments to hedge the anticipated cash flows from the repayment of foreign
currency denominated intercompany payables outstanding:
Notional Weighted Notional
Amount in Average Amount in
Type of Local Contract U.S. Fair
Instrument Currency Currency Rate Dollars Value Maturity
- ---------------- -------------- ------------ -------- ------------ -------- ---------
Forward Contract Mexican Peso 72.0 million 11.02 $6.5 million $(77,000) Dec. 2004
Forward Contract Brazilian Real 2.6 million 3.21 $0.8 million $(65,000) Nov. 2003
Interest Rate Risk
Approximately 95.0% of the Company's long-term debt is at fixed rates.
Accordingly, a change in interest rates has an insignificant effect on the
Company's interest expense. The fair value of the Company's long-term debt,
however, would change in response to interest rate movements due to its fixed
rate nature.
The Company has evaluated the impact on all long-term maturities of
changing the interest rate 10% from the rate levels that existed at July 5, 2003
and has determined that such a rate change would not have a material impact on
the Company.
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Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Based on such evaluation, such officers have
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act. In addition, such officers have evaluated and
concluded that during the most recent fiscal quarter covered by this report,
there has not been any change in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
15
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 23, 2003, an annual meeting of the shareholders of the Company was
held at which directors were elected to serve until their successors shall have
been elected and shall have qualified. The number of votes cast for, against, or
withheld/abstained and the number of broker non-votes with regard to each
nominee are set forth below:
Withheld/ Broker
For Against Abstained Non-votes
---------- ------- --------- ---------
Election of directors:
Sangwoo Ahn 14,946,679 N/A 57,004 --
Larry A. Liebenow 14,915,987 N/A 87,696 --
Jerry I. Porras 14,945,566 N/A 58,117 --
Eriberto R. Scocimara 14,952,065 N/A 51,618 --
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
31.1 Certification by the Chief Executive Officer pursuant to section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002.
(B) The Company filed a report on Form 8-K on April 24, 2003, in which the
Company furnished a press release announcing its first quarter results
for the period ending April 5, 2003.
16
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: August 6, 2003 By: /s/ Paul J. Kelly
-------------------------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer (Principal Financial Officer)
17